Question

A hedge in which an airline uses the crude oil futures to hedge its Jet fuel price risks is

		a cross hedge
		an optimal hedge
		a basis hedge
		a minimum variance hedge
		none of the above

Answer 1

The Correct answer is Option A "cross hedge"

A crosss hedge refers to the hedging of two different assets that shows positive correlation price. This is done by holding two different position of assets which helps to mittigate the risk of fluctuation in prices.

The cross hedging is done through the future markets, The airline companies has huge inventories and the rapid price fluctuations in the market can diminish the profits of the company, so to reduce the risk they use hedging where they block the prices of fuel or any other commodities that allow them stability in prices and improve the profits.